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Question #3: Hedging with Futures Contracts [20 Points] Farmer Jane is a corn farmer who plans on selling her corn in the future. Farmer Jane
Question #3: Hedging with Futures Contracts [20 Points] Farmer Jane is a corn farmer who plans on selling her corn in the future. Farmer Jane anticipates she will have 35,000 bushels of corn to sell next September. However, she is concerned that the future market price of corn will be low, which would result in low revenues from the sale of her corn. The local farm bureau forecasts three possible prices for corn next September: 370 cents, 375 cents or 380 cents Suppose the futures price is 376 cents and that each futures contract is for 5,000 bushels of corn (a) If Farmer Jane wanted to guarantee herself a certain sales price should she take a long or short position in the future contract? [3 Points] (b) How many contracts should she trade to employ a strategy to guarantee herself a certain sales price? 3 Points] (c) Show using the following table that if Farmer Jane employs the hedge strategy from Parts (a) and (b) then she is guaranteed a certain revenue next September no matter what happens to the wheat price. What is the amount of this certain revenue? SHOW YOUR WORK. [14 Points] 370 cents 375 cents 380 cents Revenue from Corn Profit from Futures Position Total Revenue
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